1.3 Flashcards
What is MPB?
Marginal private benefit. This is the benefit that consumers get from consuming an additional unit of a good / service. It represents the demand curve, and therefore is downwards sloping. This makes sense because of the law of diminishing marginal utility; as you consume an extra unit of a good/service, the benefit you recieve from it falls.
What is MPC?
Marginal private cost. These are the costs to the producers of producing an additional unit of a good / service. It reflects the supply curve, which is upwards sloping as quantity increases, price increases). This makes sense because as suppliers produce an additional unit of a good / service their costs increase, and this costs is covered through higher prices.
What are private costs, and what are private benefits?
Private Costs: The costs incurred by producers and consumers directly involved in an economic activity. These include things like wages, materials, and the price paid for goods or services.
Example: A firm’s cost of production (labor, raw materials) or a consumer’s price paid for a product.
Private Benefits: The benefits received by producers and consumers from their own involvement in an economic activity. For consumers, it’s the satisfaction or utility gained from consumption; for producers, it’s the revenue or profit from selling goods or services.
Example: The satisfaction a person gets from eating a meal or the revenue a business earns from sales.
What are external benefits, and what are external costs ?
External Costs: The costs of an economic activity that are imposed on third parties or society, but are not reflected in the market price. These are also evasive externalities. These are the negative impacts experienced by others who are not directly involved in the transaction.
Example: Pollution from a factory that affects local communities, or noise from construction that disturbs nearby residents.
External Benefits: The benefits of an economic activity that are experienced by third parties or society, but are not reflected in the market price. These are the positive spillover effects that are enjoyed by people who are not directly involved in the transaction. These are also positive externalities.
Example: A person planting a garden that beautifies the neighborhood or someone getting vaccinated, which helps reduce the spread of disease in the community.
What are social costs, and what are social benefits?
SOCIAL = PRIVATE + EXTERNAL
Social Benefits: The total benefits to society from the consumption or production of a good or service, including both private benefits and external benefits. These are the benefits received by individuals directly involved in the activity as well as those experienced by third parties or society at large.
Example: Education provides private benefits to the individual (better job prospects) and external benefits to society (a more educated workforce, lower crime rates).
Social Costs: The total costs to society from the consumption or production of a good or service, including both private costs and external costs. These are the costs incurred by individuals directly involved in the activity, along with the costs imposed on third parties or society.
Example: A factory’s private costs of production (labor, materials) plus the external costs of pollution that harm the environment or public health.
What is allocative efficiency in a free market, when there are externalities present?
What is allocative efficiency in a free market when there are o externalities>
For a market with externalities, allocative efficiency is when there is a maximisation of society surplus and resources are bing allocated efficiently.
This is when MSB=MSC.
For a market with no externalities, allocative efficiency is at MPB=MPC. The private optimum.
Explain the diagram for negative externalities in production
Remember, MPC is the supply curve, and this curve does not account for any external costs, only the private costs of the firm.
MSC accounts for the external costs, and when there are negative externalities in production, there are external costs, so MSC>MPC. On a diagram, MSC is above MPC, it is more towards the right.
Firms are no accouting or their total costs to society, only their private costs, and this leads to overproduction. From the graph it can be seen that they are selling at a lower price than they should be, and this encourages overconsumption.
Explain the diagram for negative externalities in consumption
In consumption, so the supply curve which represenst producers stays the same. MSB=MSC=S
In the case of negative externalities in consumption, consumers ignore the external costs on society as a result of their consumption, and they just focus on their private benefit. Society is worse off, and so MSB is less than MPB.
This leads to overconsumption and a misallocation of resources.
Explain the diagram for positive externalities in production
The D=MPB=MSB curve does not move.
For positive externalities in production, the benefit to society is greater than the private benefit to the firm, so MPC is drawn higher than MSC. MPC is above MSC.
This leads to underproduction.
Explain the diagram for positive externalities in consumption.
S=MPC=MSC stays constant
MSB>MPB. MSB is drawn above MPB. There is underconsumption.
What is a public good and what is a private good?
Public Good: A good that is non-excludable (no one can be prevented from using it) and non-rivalrous (one person’s use does not reduce its availability for others). Examples: clean air, national defense.
Private Good: A good that is excludable (people can be prevented from using it) and rivalrous (one person’s use reduces the availability for others). Examples: food, clothing, cars.
What is the free rider problem?
The free rider problem occurs when individuals benefit from a good or service without paying for it, because the good is non-excludable (people can’t be excluded from using it). Since people can enjoy the benefits without contributing to the cost, there’s little incentive for them to pay, leading to underproduction or lack of provision of the good.
Why does the public sector not provide public goods?
The private sector rely on charging consumers for the goods and services they provide so they can make a profit. However, with public goods, since they are non-excludable, this can lead to the free rider problem because people can enjoy the benefits of the good without paying for it. This would lead to underproduction of public goods by the private sector, which is a misallocation of resources leading to market failure. In some cases, the public sector may avoid provding the good at all leading to a missing market and total market failure.
This is why public good tend to be provided by the public sector through government intervention.
What is a Quasi publig good? (Good evaluation point)
This is a good that sometimes shows characteristics of public good, but soetimes shows characteristics of a private good.
With technology evolving we can find ways to price goods. E.g We can charge cars that use certain roads by scanning their number plates.
How do information gaps (lack of information) lead to maret failure?
A lack of infromation will lead to consumers making irrational decisions, leading to overconsumption or underconsumption.
With demerit goods, consumers dont know fully about the harmful effects that thses goods have on ones health, and therefore they are overconsumed.
With merit goods, consumers dont fully understand the benfit of consuming the goods, and therefore, they are under-consumed.h
How do infromation gaps (assymetric infromation) lead to market failure?
Assymetric information is when the existing information is not shared equally between the 2 parties involved in a transaction. (check textbook and folder for examples of this)
